Income protection insurance – all you need to know!

Income Replacement
Hobbs Financial Nov 05, 2018

Is income protection insurance right for you? Well, that all depends on you. The right type of insurance for you is going to be different from your neighbour’s and even to your closest family member’s. But one thing we can say off the bat is that nobody should over-insure, and most people agree with us on that – except perhaps certain insurance companies!

In this blog, we’re going to run through the key bits of information you need to know to decide if you should be looking to set yourself up with income protection. So, without further ado…

What is income protection insurance anyway?

Unless you’re the omega man, chances are you’re going to get sick now and then. All going well, you’ll only have to suffer the odd cold, flu or self-inflicted hangover! In cases such as these, you use up your sick days and your paycheck holds strong. But what happens if something more serious occurs?

If you’re out of work for weeks, rather than days, due to an illness or injury, income protection is going to be your saving grace. For most people, their salary is their most indispensable asset. Many things in life can go wrong, but you and your family can manage to stay afloat if you have a salary coming in. If this rings true for you, and the idea of surviving for weeks, months, perhaps even years without a salary is not viable, then you should definitely consider getting income protection.

“If you have decided you are going to get income protection but not every earner in your family can afford it, then, as long as everyone is starting out with relatively equal health, it makes financial sense to insure the person with the highest annual income.”

Eddie Hobbs

How does income protection insurance work?

With income protection, you can insure up to 75% of your salary. This 75% includes your illness benefit as well as your insurance policy claim. To clarify, if you are on long-term sick, you are entitled to an illness benefit from the government. When you add your illness benefit and your insurance protection claim together, the total will not exceed 75% of your salary. You will receive your claim on a weekly/monthly basis and the payouts will last until you return to work, retire or (you guessed it) die.

Deferred period

When setting up your income protection policy, you will decide how long your deferred period will be. The deferred period is how long you will be not working before you start receiving payouts from your claim. Deferred periods can be very wide-ranging, from 4 weeks to 8 weeks to 26 weeks or more, but this can be dependent on the Ts & Cs of individual insurance providers.

The decision of how long your deferral period will be is based on what savings you expect to have at any given time, who is prepared to support you and for how long as well as what policy your employer has in place regarding the length of sick leave. However, the longer your deferred period is, the lower the premium.

Tax

Income protection insurance is subject to tax. This is because the pay-outs you receive are still considered a form of income. Therefore, you will pay the relative tax rate for the total of your financial incomings. If applicable, you can avail of tax relief at your marginal rate at the end of the year. On the plus side, the monthly cost of the insurance premium is a full tax write-off.

How much does income protection cost?

To avail of income protection insurance, you will pay a monthly or annual premium. The cost of this depends on a number of factors, and that is us being truthful, not evasive! It will depend on your answers to the usual insurance questions with regards to your lifestyle, age, occupation, health, medical history, etc.

But you also need to figure out how income protection is going to work for you. How long will your deferred period be? How much cover do you think you will need? And what is the length of your policy? All these factors affect the cost of your income protection premium.

Consider a 40-year-old is diagnosed with a back injury (or any illness that prevents him or her from pursuing their career). The loss of, say, a €100,000 gross income over 25 years to retirement (age 65), allowing for 3% per annum increases runs to €3.65 million. That is a huge loss. The good news is that 75% of it can be replaced, generating a potential claim value of €2.7 million to retirement. The even better news is that, after tax relief, the cost of the insurance can be as cheap as €100 per month.

An income protection case study

This is a real claim we handled to give you an idea. In 2018, our firm successfully processed a claim for a partner in a firm who’d been maintaining cover for two decades but was diagnosed with an illness which meant that he was unfit to continue his profession. He is today in receipt of a monthly income of €12,000. This insurance isn’t easy to get, it is pretty strictly underwritten and costs will be dependent on health and occupation and, believe us, not all insurers are the same when it comes to paying claims so buying on the basis of cheapest price is a bad idea.

Do you need help deciding if income protection insurance is right for you?

Get in contact with our team today to iron out the finer details of what your income protection insurance will look like. At Hobbs Financial Practice, we offer unbiased advice tailored to you!